Report: Housing Crisis Remains Long-Term Challenge.

CAMBRIDGE, MA -- Research shows expected slow turnaround and continued U.S. housing market weakness should not have a detrimental impact on its overall long-term growth potential. Housing affordability, however, remains the chip-on-the-shoulder issue persisting in the long run.

The 2007 State of the Nation's Housing report from Harvard University's Joint Center for Housing Studies indicates that even though in time the housing market will recover, currently it is adjusting to "sharp drops in housing demand and an oversupply of stock" as many homebuyers, investors and second homebuyers opted out. Housing starts and sales fell in 2006 and "are on track to end this year even lower" causing house price depreciation in some areas.

"The air went out of the inflated housing market as higher home prices and interest rates finally tempered demand," explained Nicolas P. Retsinas, director of the Joint Center for Housing Studies.

The report found in the latter half of 2006, the drop in homebuilding was so drastic that it shaved more than a full percentage point off national economic growth. Though builders cut back on housing starts, the numbers of vacant homes for sale rose by more than 500,000 from the fourth quarter of 2005 to the fourth quarter of 2006 and continued to rise in the first quarter of 2007.

"Last year we talked about a turning point ahead, and as we know over the last year the market did turn. We're clearly going through a market correction that is slowed because of the problems of subprime lending," Mr. Retsinas told MSN.

In the short run, Mr. Retsinas believes the marketplace "will work off this inventory and we'll see the existing home markets start to turn around maybe as early as the end of 2007 and will go into 2008 before we see a turn around.

"The long-term prospects remain bullish. It's a question of how long it will take us to get through this correction? It's as if we forgot that this is a cyclical industry, because for many years it kept going up, up, up. Some people thought it would never stop. I have called it 'extreme extrapolation complex.' Well, it is a cyclical industry and we're in the downside of the cycle. As a result of that, some people took out mortgages otherwise they wouldn't have."